Thailand's Yingluck says to let baht appreciate: report

Reuters News
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Posted: Jul 06, 2011 9:23 PM
Thailand's Yingluck says to let baht appreciate: report

BANGKOK (Reuters) - Thailand will continue to let the baht appreciate against the dollar to limit import price inflation, the country's incoming prime minister, Yingluck Shinawatra, told the Wall Street Journal in an interview published on Thursday.

Yingluck also told the newspaper she would continue to allow the baht to float freely and had no plans to change the existing exchange-rate system.

Suchart Thadathamrongvej, an economic advisor and possible Finance Minister candidate for Yingluck's Puea Thai Party, had told Reuters on Monday that Thailand should move to a managed fixed exchange-rate system for the baht, like China or Singapore, pegging the baht to a basket of currencies.

Puea Thai, the party backed by self-exiled former Prime Minister Thaksin Shinawatra, won Sunday's election in a landslide, with 265 of the 500 lower house seats.

Yingluck's economic policies are widely expected to deliver a burst of consumer spending and investment, but economists say they could also cause a host of problems from higher debt to delays in economic reforms, and an inflationary rise in the cost of business in Southeast Asia's second-largest economy.

This week, she has been meeting with her economic team to fine tune the policies and programmes promised during the campaign, including a roughly 40 percent rise in the minimum wage to 300 baht ($9.70) and a cut in the corporate tax rate.

For the past decade, Thailand's minimum wage has trailed inflation, creating one of the widest gaps between rich and poor in Asia and fuelling working-class frustrations that helped spur violent street protests last year.

Puea Thai has said it would change that by improving conditions for farmers, low-wage workers and young university graduates, in part by providing easy credit and lifting wages.

To compensate employers paying higher wages, Yingluck has promised to cut the corporate tax rate to 23 percent next year and 20 percent a year later from the current 30 percent.

She has said she will more than offset the increased labor cost faced by employers, and that about 70 percent of employers already pay workers 300 baht or more a day.

Critics say employers in remote rural areas with poor infrastructure will be hard-pressed to pay the same wages as those in or near Bangkok.

STIMULATE CONSUMPTION, INVESTMENT

In theory, billions of extra dollars pumped into Thailand's rural economy will stimulate consumption, creating a Keynesian multiplier effect.

Under Thaksin, money funnelled into villages through a debt moratorium for farmers and cheap loans had a knock-on effect on the whole economy, fuelling a boom in household spending -- a style of policymaking known in Thailand as "Thaksinomics."

Gross domestic product (GDP) grew on average by 5.7 percent a year between 2002 and 2006, despite the headwinds of high oil prices, the Iraq war and an outbreak of the SARS virus. That compared with growth of 2.2 percent in 2001 and the economic turmoil of the late 1990s.

Yingluck has vowed to push ahead the Thaksinomics revival, raising concerns among economists and some business leaders over whether Thailand will see a dramatic increase in debt, and acceleration in inflation.

Thailand's debt-to-GDP ratio already was expected to rise from a current 42 percent to above 60 percent -- generally regarded as the safe limit for developed economies -- within six years, according to the central bank. Sudden expansionary policies could accelerate that trend.

Inflation is also rising, reaching 4.2 percent in May, its highest in 32 months. A Reuters poll on Tuesday showed economists had upwardly revised expectations for interest rates following Yingluck's election victory, and expect the central bank to tighten faster than previously thought.

According to the average forecast of economists surveyed by Reuters, the benchmark one-day repurchase rate may rise to 3.75 percent by year-end, up from a forecast of 3.50 before the election.

($1 = 30.475 Thai Baht)

(Reporting by John Chalmers in Singapore and Jason Szep in Bangkok; Editing by Daniel Magnowski)